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Monday view: Airbus could trigger 'nuclear option' of currency controls
By Ambrose Evans- Pritchard
Last Updated: 1:59am GMT 27/11/2006
If you have funds across the Channel, or a ferme in Acquitaine, be vigilant. Keep a close eye on Europe's press, because you might one day find your money is nailed more immovably to its Continental home than you had thought.
Four years ago, a small "cellule" inside the European Commission was ordered to draft a report, instigated by Paris, examining the legal basis under EU treaty law for 1970s-style exchange controls. It concluded that Brussels may lawfully freeze capital flows in and out of the EU, and within it, and that this could be done by a "qualified majority" of EU finance ministers, leaving Britain with no veto.
One of its authors told me this was not an abstract exercise. It was to enable Europe to stem the rise of the euro if the dollar goes into free fall, the underlying argument being that Washington should not be allowed export the consequences of its own reckless spending policies through a "beggar-thy-neighbour" devaluation.
The idea was to stop money coming in, though it could equally be used to stop money leaving.
I thought of this study when French premier Dominique de Villepin lashed out this month at the over-mighty euro. "We can't let the European Central Bank act alone on the exchange rate," he said. Ségolène Royal, the new Socialist leader, upped the ante a week later, accusing the ECB of "shattering growth".
Then on Friday the euro smashed through $1.30 to the dollar, crossing the line drawn in the sand by Paris and Berlin. This entails a near equal rise against China's yuan. Against Japan's yen, the euro has risen nearly 70pc in six years to an all-time high of Y151. Hence the move by PSA Peugeot-Citroen to build its 4x4 sportif models in Japan.
EU finance ministers have other means short of exchange controls to bring the ECB to heel and cap the euro. Article 111-2 of the Maastricht Treaty gives them powers to shape exchange rate policy, a detail missed by the markets.
If, for example, the Europols strike a deal with Japan to "manage" the euro-yen rate, the ECB has to adjust monetary policy to meet that objective.
This is where it gets ugly. The ECB's Bundesbank bloc would almost certainly resist such a death blow to the bank's independence, which is why the threat of currency controls may ultimately be part of the mix. There is little Frankfurt can do to stop that.
To quote precisely, the report reads: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months." The freeze could be extended for another six months with a fresh vote, and so on.
After combing through court judgments, these experts concluded that free movement of capital in the EU is not an "absolute freedom" and could be limited in an emergency.
Heavens know where this "nuclear option" would leave the City of London, dependent for its life blood on unhindered dollar flows. Obviously, it would precipitate a membership crisis.
In fairness, I am not suggesting that the free-market Barroso commission would hatch such a Delors-era plot. But the decision is now out of their hands. What matters is whether France could ever muster a majority of EU finance ministers behind such a scheme. The answer is yes, perhaps, in a slump.
For now, the document sits, waiting to be dusted off when capital flows can be said to "endanger" EMU.
That moment has not arrived. Europe's housing boomlet is not quite exhausted. Yet monetary union is subtly unravelling. French growth fell to zero in the third quarter on sliding exports. Italy is trapped in a downward spiral, doomed by a 20pc currency over-valuation. Fitch and S&P have downgraded its debt to Botswana levels.
Last week, EU monetary commissioner Joaquin Almunia warned of Italy's "dramatic slowdown", and of a widening gap in growth rates between eurozone states that could threaten the viability of EMU if it continues. "The adjustment in the euro area has been slower than we would like and we cannot ignore this fact," he said.
My hunch is that Airbus will bring matters to a head. I was told by an Airbus official last year that if the euro exchange rate went above $1.30 for long, the company was "cooked". He said the chances of this happening were almost nil.
Well, "nil" may be here. While Airbus has an order backlog of 2,177 aircraft worth $220.3bn, these delivery contracts are in dollars while costs are in euros. "This is the nub of the problem," said Louis Gallois, the Airbus chief.
In 2004, the group was shielded by currency hedges at an average rate of $0.98. This year the rate is $1.12, and the hedges are expiring fast. Soon Airbus will face the full violence of the spot market. The aerospace champion is so deeply tied up with Europe's sense of industrial self-worth that it will not be sacrificed lightly on the altar of free currency flows. When the French premier vowed to do whatever it takes to save Airbus, I believed him.
Monday view: Airbus could trigger 'nuclear option' of currency controls By Ambrose Evans- Pritchard
Last Updated: 1:59am GMT 27/11/2006
If you have funds across the Channel, or a ferme in Acquitaine, be vigilant. Keep a close eye on Europe's press, because you might one day find your money is nailed more immovably to its Continental home than you had thought.
Four years ago, a small "cellule" inside the European Commission was ordered to draft a report, instigated by Paris, examining the legal basis under EU treaty law for 1970s-style exchange controls. It concluded that Brussels may lawfully freeze capital flows in and out of the EU, and within it, and that this could be done by a "qualified majority" of EU finance ministers, leaving Britain with no veto.
One of its authors told me this was not an abstract exercise. It was to enable Europe to stem the rise of the euro if the dollar goes into free fall, the underlying argument being that Washington should not be allowed export the consequences of its own reckless spending policies through a "beggar-thy-neighbour" devaluation.
The idea was to stop money coming in, though it could equally be used to stop money leaving.
I thought of this study when French premier Dominique de Villepin lashed out this month at the over-mighty euro. "We can't let the European Central Bank act alone on the exchange rate," he said. Ségolène Royal, the new Socialist leader, upped the ante a week later, accusing the ECB of "shattering growth".
Then on Friday the euro smashed through $1.30 to the dollar, crossing the line drawn in the sand by Paris and Berlin. This entails a near equal rise against China's yuan. Against Japan's yen, the euro has risen nearly 70pc in six years to an all-time high of Y151. Hence the move by PSA Peugeot-Citroen to build its 4x4 sportif models in Japan.
EU finance ministers have other means short of exchange controls to bring the ECB to heel and cap the euro. Article 111-2 of the Maastricht Treaty gives them powers to shape exchange rate policy, a detail missed by the markets.
If, for example, the Europols strike a deal with Japan to "manage" the euro-yen rate, the ECB has to adjust monetary policy to meet that objective.
This is where it gets ugly. The ECB's Bundesbank bloc would almost certainly resist such a death blow to the bank's independence, which is why the threat of currency controls may ultimately be part of the mix. There is little Frankfurt can do to stop that.
To quote precisely, the report reads: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months." The freeze could be extended for another six months with a fresh vote, and so on.
After combing through court judgments, these experts concluded that free movement of capital in the EU is not an "absolute freedom" and could be limited in an emergency.
Heavens know where this "nuclear option" would leave the City of London, dependent for its life blood on unhindered dollar flows. Obviously, it would precipitate a membership crisis.
In fairness, I am not suggesting that the free-market Barroso commission would hatch such a Delors-era plot. But the decision is now out of their hands. What matters is whether France could ever muster a majority of EU finance ministers behind such a scheme. The answer is yes, perhaps, in a slump.
For now, the document sits, waiting to be dusted off when capital flows can be said to "endanger" EMU.
That moment has not arrived. Europe's housing boomlet is not quite exhausted. Yet monetary union is subtly unravelling. French growth fell to zero in the third quarter on sliding exports. Italy is trapped in a downward spiral, doomed by a 20pc currency over-valuation. Fitch and S&P have downgraded its debt to Botswana levels.
Last week, EU monetary commissioner Joaquin Almunia warned of Italy's "dramatic slowdown", and of a widening gap in growth rates between eurozone states that could threaten the viability of EMU if it continues. "The adjustment in the euro area has been slower than we would like and we cannot ignore this fact," he said.
My hunch is that Airbus will bring matters to a head. I was told by an Airbus official last year that if the euro exchange rate went above $1.30 for long, the company was "cooked". He said the chances of this happening were almost nil.
Well, "nil" may be here. While Airbus has an order backlog of 2,177 aircraft worth $220.3bn, these delivery contracts are in dollars while costs are in euros. "This is the nub of the problem," said Louis Gallois, the Airbus chief.
In 2004, the group was shielded by currency hedges at an average rate of $0.98. This year the rate is $1.12, and the hedges are expiring fast. Soon Airbus will face the full violence of the spot market. The aerospace champion is so deeply tied up with Europe's sense of industrial self-worth that it will not be sacrificed lightly on the altar of free currency flows. When the French premier vowed to do whatever it takes to save Airbus, I believed him.
